A new era
Accelerating toward 2020 —
An automotive industry transformed
Contents


The transformations to come                 1

The restructuring imperative                2

Changing customer...
The transformations
to come

At least now, the picture is clear                      each will rely on higher volume globa...
The restructuring
imperative

                                       The current economic crisis has accelerated deep stru...
The rise of manufacturing in lower cost                   Figure 3: Light vehicle production forecast (millions of units)6...
Figure 6: Share of production among top global OEMs producing 50,000 units                                                ...
intellectual property remains in the hands of the        Figure 8: 77 percent of global production is concentrated among 1...
Dr. Jerome Guillen, Director, Business Innovation,
                                                                       ...
Figure 10: The importance of global platform architectures has increased significantly23

                              200...
Changing customers,
                          changing demands

                          Over the next ten years, the aut...
Seven major global customer trends to watch              That said, as in the developed world, cost will not
In both devel...
3. Shades of green — cost vs. consciousness
                                                                              ...
4. Safety first – consumers to be attentive               Consumers also professed interest in features that:
   to innovat...
While the need to test drive is the major barrier to
                                                                     ...
gain and retain their business. A recent Deloitte            poor enough that people who currently own cars are
Consulting...
14
Technology to reflect new
sets of demands

Consumer demands and new regulations will heavily influence the development and
...
Currently, electric vehicles are significantly more        Government incentives to spur EV adoption are also
     expensiv...
Internal combustion engines to dominate in               world.79 And, similar to those barriers cited for
emerging market...
Figure 18: The most talked about electric vehicles81

                                    Electric
                       ...
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  1. 1. A new era Accelerating toward 2020 — An automotive industry transformed
  2. 2. Contents The transformations to come 1 The restructuring imperative 2 Changing customers, changing demands 8 Technology to reflect new sets of demands 15 Getting the right skills 22 The next chapter in industry history 26 Endnotes 28
  3. 3. The transformations to come At least now, the picture is clear each will rely on higher volume global platforms For the past few years, automotive leaders and supported by networked design centers in key observers have witnessed an industry in peril. A emerging markets. slowing global economy, coupled with declining consumer confidence, has translated into dismal An era of “conscious consumption” will emerge. new car sales in most markets. Customers around the world will be more cost conscious, especially in the developing world where But the slump has masked many outstanding millions of drivers will make their first ever car purchase. industry advancements. Standards of quality and productivity, for example, have been raised without Environmental considerations will also weigh heavily a corresponding increase in price. Cars today are on the industry towards 2020. The fierce race to safer, more fuel efficient, and more technically develop and produce electric vehicles, spurred by advanced than ever. And, the automotive workplace both customer demand and government incentives, has evolved from an image of “dark, dirty and will mean that up to a third of all cars purchased in dangerous” to an environment of high skills, developed countries in 2020 will not be propelled by advanced technologies, and dynamic change. an internal combustion engine. Despite this, competitive and financial pressures This technological imperative will escalate an already have led to a number of high-profile bankruptcies. intense war for talent by 2020. The workforce of the Production utilization in North America, Western future will not only need more complex skill sets but Europe, and Japan has dropped dramatically leading to will also need to be flexible so that companies can widespread job losses. Even with discounts and other employ them most productively. At every level, a more purchase incentives, consumers, wary of an uncertain proactive approach to training will be implemented, economic future, have yet to return to the showroom as part of a more progressive and comprehensive without extraordinary government incentives. approach to talent management. The challenge to attract highly skilled workers will be especially acute So, what will be the shape of the automotive in developed markets. Emerging markets, with their industry as the world emerges from the economic younger demographics and plentiful engineering talent, downturn? In this report, Deloitte Touche Tohmatsu’s will pick up the slack left by the talent shortage. senior automotive leaders offer a perspective on the structural changes and major customer, technology, What must not be lost in any of this is the increasing and people trends expected to transform the role of government. Governments in all major industry over the next decade. markets have become active industry players. Their investments through emergency loans and incentive A massive shift in the competitive landscape will packages will have a lasting impact on the industry’s see China and India emerge as major players in the direction. The nature of their continued support industry. These markets will join Western Europe, to domestic companies, as well as energy and Japan, Korea, and the United States as the centers environmental policies, will do much to mold the of design and manufacturing for original equipment automotive sector over the next ten years. manufacturers (OEMs) and their suppliers. To be sure, there will be no resumption of the status By 2020, as few as ten volume OEMs groups quo. Automakers and their suppliers will need to based in these six major markets will account for reinvent themselves to meet the challenges of a 90 percent of global sales. To remain competitive, dramatically new global automotive landscape. A new era Accelerating toward 2020 — an automotive industry transformed 1
  4. 4. The restructuring imperative The current economic crisis has accelerated deep structural change in the automotive industry, setting the stage for sustainable growth. High-cost exporting countries will see domestic capacity closed as vehicle production continues to migrate to the “new Detroits”: Lower-cost centers dotted across India and China and other locations in the regional trade zones of North American Free Trade Agreement (NAFTA) and the European Union. High-volume global platform architectures will become the norm. And, convergence will drive the emergence of new business models characterized by alliances with players from other industries to support new technologies. Figure 1: NAFTA light vehicle assembly capacity utilization (Feb 2008 vs. Feb 2009)2 A recalibration of the automotive industry value 100% chain is in motion. The marked decline in sales over the past three years led to excess capacity in 85% 86% 80% plants around the world, including North America 76% 77% 71% and the European Union (see Figures 1 and 2). Some of the numbers are startling: Like most of its 48% 44% 48% competitors, for example, Honda went from full 43% 41% 38% 37% capacity in February 2008 to utilizing less than half capacity (48 percent) a year later.1 Profitability for OEMs has been hurt and margins for suppliers have sunk below the break-even point, triggering reduced capacity, resourcing to stronger suppliers, a rash Feb F b Feb F b Feb F b Feb F b Feb F b Feb F b Feb F b Feb F b Feb F b Feb F b Feb F b Feb F b Feb F b Feb F b ’08 ‘09 ’08 ‘09 ’08 ‘09 ’08 ‘09 ’08 ‘09 ’08 ‘09 ’08 ‘09 of bankruptcies, and in some cases, the need for Chrysler Ford GM Honda Nissan Toyota Other government bailouts. Source: Ward’s Auto, Data Reference Center Of course, the crisis will not last forever and short- term sales projections foresee over 70 million units Figure 2: European Union light vehicle assembly capacity utilization (2007 vs. 2009)3 sold worldwide by 2015 (see Figure 3). While 92% 90% 89% 89% opinions differ about the timing of the turnaround, 83% 79% 80% there is no doubt that the structure of the 72% 69% 70% 65% automotive industry will be deeply transformed. 64% 57% 53% The decline of Detroit Once the core of the global automotive industry, Detroit’s influence has declined steadily over the past few decades. Sales of signature models have been slowed by the waning popularity of large cars and Detroit’s struggle to compete in the small car 2007 2009 2007 2009 2007 2009 2007 2009 2007 2009 2007 2009 2007 2009 segment. What’s more, Detroit has already lost its leadership in engineering. Most cars manufactured Germany France Spain UK Italy Czech EU27 in 2007, for example, had their primary development Source: Ward’s Auto, Data Reference Center in Asia and Europe and this trend is expected to continue into 2015 (see Figure 4). 2
  5. 5. The rise of manufacturing in lower cost Figure 3: Light vehicle production forecast (millions of units)6 regions 80 The move to lower cost regions will be driven by 70 two forces: Cost and demand. The cost of labor South America S th A i 60 in emerging markets continues to be a fraction of Number of vehicles North America that in the developed world (see Figure 5). To take millions) 50 Japan/ Korea advantage of the expanding population in emerging produced (m 40 South Asia markets, OEMs will continue to shift more of their Greater China 30 production to be closer to their biggest source of Middle East/ Africa new customers. For example, Greater China and 20 Europe South America will represent more than 50 percent 10 of growth in global light vehicle production from 0 2008 to 20154. 2008 2009 2010 2011 2012 2013 2014 2015 Source: CSM Worldwide “As the volume of cars sold in these emerging Figure 4: Falling primary development in North America7 markets rises, it will be increasingly necessary for 50 OEMs to move closer to the demand centers,” says 43 RC Bhargava, Chairman, Maruti Suzuki India. “This 40 will be for competitive reasons, which are stronger elopment 33 33 millions) than the lower cost reasons. Engineering for the 30 26 by region (m local customer is also critical, making it another Primary deve major driver.”5 20 10 9 The expected growth of trading blocks (e.g., NAFTA, 4 European Union, ASEAN, and Mercosur) will drive 1 1 0 continued development of regional production Asia Europe Norh America Others systems, with a migration to lower-cost locations 2007 2015 within each region. High exchange rate volatility Source: CSM Worldwide and Automotive News and rising transportation costs have led OEMs and Figure 5: Labor cost comparisons ($/Hour)8 suppliers to focus more on low-cost sourcing within Today’s high cost of production a region. OEMs will increasingly look to balance 12.0 $40.0 production and sales footprints to reduce exposure 10.0 $35.0 Cost of labor ($/Hr) ) Numb of vehicles uced (millions) to adverse exchange rate shifts. The overall effect $30.0 8.0 of this shift is that by 2020, there will be fewer cars $25.0 sold as imports from outside a trade zone (e.g., 6.0 $20.0 ber o produ Korea to the United States or Japan to the European 4.0 $15.0 Union). Even those cars with foreign labels will be $10.0 2.0 produced regionally. For that reason, OEMs welcome $5.0 the emergence of broader trade agreements that 0.0 $0.0 US / Mexico Western Eastern Japan South India China Brazil support greater flexibility. Canada Europe Europe Korea High cost Low cost The new pockets of low cost areas within the region developed markets Production (2008) emerging markets Cost of Labor will become hubs for OEMs at the expense of higher Source: Cost of Labor – Economic Intelligence Unit, Data Dictionary, Total Production 2008 – Ward’s cost exporters such as Spain and Germany (in the Automotive Data Reference Center A new era Accelerating toward 2020 — an automotive industry transformed 3
  6. 6. Figure 6: Share of production among top global OEMs producing 50,000 units European Union) and the U.S. and Canada (within in 200714 NAFTA). This strategy is already unfolding. Suzuki, 35.0 16 for example, established plants in Hungary to supply 30.0 the European Union, while Volkswagen and Nissan Cumulative global market share 12 manufacture in Mexico to supply the members of 25.0 NAFTA.9 Renault is building a full-scale assembly plant Number of OEMs 20.0 in Morocco that will produce Logan-based cars for 8 global export, mainly to Europe, starting in 2010.10 15.0 10.0 4 China on the move 5.0 Before a Chinese company establishes itself as a leading global producer, the industry will undergo 0.0 0 Japan Western US China South a period of deep consolidation. This will reverse Europe Korea the relatively weak global market share position Market share Number of players of Chinese OEMs today (see Figure 6). In the near Source: Automotive News, Data Center term, the Chinese government plans to consolidate the top 14 local automotive players into 10 with Figure 7: Joint venture sales represent nearly half of all Chinese automotive sales15 a domestic market share in excess of 90 percent. Dongfeng Nissan, Within the top 10, the government directive is for Cherry Auto, 6.8% two or three to attain annual output of two million 5.5% units and four or five to produce one million units FAW-VW, 9.7% annually.11 In most segments, the supply base is expected to consolidate 30 to 50 percent.12 Guangzhou Honda, The government mandate also encourages 5.3% automakers to develop their own brands, with a Others, 40.2% target of boosting the share of Chinese domestic brands to at least 40 percent of the national market. Shanghai GM, 9.1% Meanwhile, domestic Chinese manufacturers have been charged with exporting up to 10 percent of their product.13 Shanghai VW, 9.4% Chinese OEMs will find themselves in a fierce battle for Geely, 4.6% Toyota JV, 9.3% Joint venture sales supremacy in their own market. Management is highly Chinese company sales motivated to stake their position and prove to Beijing that they deserve to be among the chosen few to lead Source: Ward’s Automotive Data Reference Center, China Sales by Company China’s foray into the global automotive market. Currently, the Chinese industry is also characterized by a high number of joint ventures with established players. The arrangement has provided Chinese companies with auto-making expertise, while also providing the only way into the Chinese market for their partners (see Figure 7). However, most of the 4
  7. 7. intellectual property remains in the hands of the Figure 8: 77 percent of global production is concentrated among 10 companies16 foreign joint venture partners. Global Cum. 2008 global Rank OEM group HQ location market market Important questions remain about the future of joint production share share ventures in China. All eyes are on Beijing as they decide whether to allow greater foreign ownership 1 Toyota Japan 9,237,780 13.3% 13.3% or tighten restrictions to protect the fledgling domestic producers. 2 GM United States 8,282,803 11.9% 25.2% 3 Volkswagen European Union 6,437,414 9.3% 34.4% Consolidation and a new global balance Consolidation is well underway and today 10 4 Nissan-Renault Japan/ European Union 5,812,416 8.4% 42.8% global OEMs account for over 77 percent of 5 Ford United States 5,407,000 7.8% 50.6% global production (see Figure 8). Fiat has taken over Chrysler and Volkswagen has swallowed 6 Fiat-Chrysler European Union 4,417,393 6.4% 56.9% Porsche. Deals like these increase scale, streamline distribution, boost asset efficiency, and provide 7 Hyundai-Kia Korea 4,126,411 5.9% 62.9% access to previously limited markets. 8 Honda Japan 3,912,700 5.6% 68.5% In some cases, companies will make targeted 9 PSA European Union 3,325,407 4.8% 73.3% acquisitions to gain access to new markets, channels, or technologies. In others, companies 10 Suzuki Japan 2,623,567 3.8% 77.0% may adopt ‘roll up’ strategies and make multiple Source: International Organization of Motor Vehicle Manufacturers acquisitions to rationalize capacity in a market niche and develop a dominant position. Figure 9: The dominant groups (>1 million units) will be headquartered in six major markets17 A new breed of players will emerge, as well as HQ location OEM and current HQ Potential 2020 HQ a new global balance — with more competitors headquartered in emerging manufacturing hubs, VW, Renault-Nissan (0.5), European Union 5.5 3.5–4 particularly in India and China (see Figure 9). When Fiat-Chrysler, PSA, Daimler, BMW the dealing is done, the landscape will be dominated United States GM, Ford 2 1.5–2 by global OEMs and suppliers based in six major markets: Western Europe, Japan, the United States, Toyota, Nissan-Renault (0.5), Japan 5.5 2.5–3 Korea, China, and India. The Renault-Nissan alliance Honda, Suzuki, Mazda, Mitsubishi is likely to be a model for others seeking platform China 0 1.5–2 and procurement scale but unwilling to risk the challenges of full integration. India 0 0.5–1 Korea Hyundai-Kia 1 0.5–1 Source: Deloitte Touche Tohmatsu analysis. August 2009 A new era Accelerating toward 2020 — an automotive industry transformed 5
  8. 8. Dr. Jerome Guillen, Director, Business Innovation, and Dr. Frank Spennemann, Senior Manager, “China is closer to having product for Business Innovation at Daimler AG suggest that, mature markets than most think.” “the emergence of new major global suppliers in traditional commodities is doubtful due to the — Matt O’Leary strong technological foundations of existing players, Director, Corporate Strategy, Ford Motor Company as well as the degree of investment required to become established in developed markets – at the same time, there will certainly also be chances for Supplier networks in low-cost centers smaller, highly innovative pioneers who are able As OEMs and suppliers move to regional models to respond rapidly to emerging demands in new for both low-cost production and design, they will technologies.”19 Ford’s Matt O’Leary, Director, need to examine production quality and maturity Corporate Strategy, also says that “technology will in the low cost regions and then choose from the come from non-traditional places. Alliances will be following supplier strategies: broader than what the auto industry has had in the 1. Move existing suppliers, along with the OEM, to past.”20 OEMs will need to adopt a mix of supplier set up regional low-cost facilities. strategies to ensure the availability of the necessary 2. Identify companies in the local marketplace to components, quality, and technologies as they replace existing suppliers (but only when local expand their operations in emerging markets. markets display sufficient maturity). 3. Encourage established suppliers to partner with Higher volume global architecture will local companies (through joint ventures or other become the norm mechanisms) to combine technology know-how A common challenge for automakers is the with local, low-cost manufacturing. inefficiently low volume of units produced per platform. To remain cost competitive, OEMs have Developing these supplier networks will be one of started to reduce the number of platforms they the greatest challenges OEMs will face over the next produce and are achieving much greater diversity of ten years. Existing suppliers are strained and often models produced from each platform (see Figure 10). lack the financial muscle to add new manufacturing Honda, with its flexible common platform, developed capacity in new markets. Suppliers are also sensitive three dimensionally-distinct versions of the Accord, to technology transfer to local third parties, rightly allowing for market-unique designs where 60 percent fearing the creation of new, lower-cost competitors. of the components are common. And Ford CFO Lewis Booth reports that the company aims to build Because of this, and the need to move quickly to 680,000 vehicles per core global platform within five capture growing markets, Ravi Sud, CFO of Hero years, up from current levels of 345,000 units.21 Group, believes that increased collaboration among suppliers is inevitable. “Manufacturers need to be To remain competitive and maintain centralized able to cater to ever-changing customer demands in quality controls in rapidly-growing emerging markets, the shortest possible time. They need to gain access regional design centers will have to be globally to technology faster and ensure the technology is networked. Examples of this emerging trend include launched faster.”18 Renault, which established a design studio in Mumbai to create vehicles for India; PSA Peugeot Citroen which maintains a technical and styling center in Shanghai; and Daimler with one center in Pune, India and plans for a Benz design center in Beijing.22 6
  9. 9. Figure 10: The importance of global platform architectures has increased significantly23 2003 Top five global platform volumes 2007 Top five global platform volumes (Million units produced) (Million units produced) GM T800 (Silverado, Tahoe, Escalade, etc.) 1.67 VW A5 (Golf, Passat, A3, TT, etc.) 2.58 VW PQ35 (Golf, Bora, Beetle, A3, etc.) 1.42 Toyota MC (Camry, Avalon, ES) 1.87 Toyota NCV (Corolla) 1.31 Renault/Nissan X85/B (Clio, Micra, Logan) 1.86 Honda CYR (Accord,Odyssey) 1.18 Ford C1/P1 (Focus, 3 & 5, S40, V50, C70) 1.66 Toyota TMP (Camry) 1.08 Toyota NBC (Vitz/Yaris, Ayao, etc.) 1.53 Total 2003 top five 6.66 Total 2007 top five 9.50 Source: Automotive news, Data center Figure 11 – Increase in global platform volumes24 500 195 450 190 400 Average volume/platform (<50,000 units per year) 185 <50,000 units per year) 350 atforms 300 180 p Number of pla s 250 175 200 150 170 N (< A ( 100 165 50 0 160 1997 2003 2009 2015E Average volume/platform Number of platforms Source: CSM Worldwide A new era Accelerating toward 2020 — an automotive industry transformed 7
  10. 10. Changing customers, changing demands Over the next ten years, the automotive industry will likely see the most dramatic changes in customer buying preferences in its 100-year history. Profound in their nature and implications, these changes will play out differently according to the dichotomy between mature and emerging markets. Customers will fragment into distinctly different segments by 2020. Attitudes altered by the recession will continue to evolve in mature markets, while a shift from economy cars to luxury segments will occur in emerging markets. Advancements in alternative technologies will also transform consumer mobility. OEMs will struggle to make required investments and develop the capabilities to deal with these trends. The winners will be the ones that profitably and flexibly meet regional customer requirements. Figure 12: Projected customer segment shifts by 202025 Developed/mature markets Emerging markets Small portion Relative size of customer segment Significant Small portion Relative size of customer segment Significant of market portion of market of market portion of market Current OEM Current OEM p y Capability p y Capability Conscious Consumption Conscious Consumption Custom Segment Custom Segment Safer, Smarter Safer, Smarter Shades of Green Shades of Green mer mer Moving up Moving up Caught in a Web Caught in a Web Older, Wiser Older, Wiser and Cooped-up and Cooped-up Net-worked 2009 2020 Net-worked 2009 2020 Source: 2009 Deloitte Internal Automotive Survey (United States, European Union, Japan, China, Russia, Brazil, Mexico, and India). Deloitte Consulting LLP The customer dichotomy consumers will demand that their vehicles are Segmentation of customers is nothing new to connected to their computers, mobile phones, work marketers in the automotive space. However, by and homes. 2020, the fragmentation of customer needs across the world means that automakers will have to pay These customer trends create tremendous economic more attention to regional demand. challenges for OEMs. In 2009, customers show little willingness to pay extra for entertainment Global OEMs must grapple with the reality that features and green technologies. Meanwhile, the customer demand in both mature and emerging cost to develop and manufacture these technologies economies is changing, albeit vastly different ways remains stubbornly high. The winning OEMs will (see Figure 12). By 2020, consumers in emerging be able to leverage their brands and marketing to markets will move beyond basic vehicles to embrace stimulate consumer demand for these features while luxury vehicles and green technologies. While in achieving manufacturing efficiencies that result in mature markets, as the global recession fades, sustainable profits. 8
  11. 11. Seven major global customer trends to watch That said, as in the developed world, cost will not In both developed and emerging markets, OEMs and be the only consideration. The expectations of first- suppliers should be conscious of the following trends time buyers in developing markets will likely increase in order to take advantage of the most important rapidly. Value-oriented models will need to offer opportunities emerging towards 2020: safety and technology features commonly associated with today’s premium brands. 1. Conscious consumption – a growing emphasis on value A variation of this value-perception phenomenon “Economic crises imbed themselves in the memories is being seen in China, says Ford’s Matt O’Leary. of those who live through them”, says Matt “In the interior of the country, there has been O’Leary of Ford. “The global recession will have a movement from motorcycles to small cars but price lasting impression on consumer behavior.”26 Even remains the most important factor. But individuals as prosperity returns, the value of money takes on in coastal areas are willing to spend money on the new meaning. As such, the current economic crisis latest and greatest and on a global product. They will leave more value-oriented car customers in its see themselves as part of the global market.”30 wake. In fact, a recent Deloitte Consulting LLP survey indicated there will be a significant shift of purchase 2. Moving up — the emergence of new wealth priorities.27 Value and safety will become the most in emerging markets important features. As a result, smaller car models The growth of the middle class (and subsequent with enhanced safety features will enjoy stronger jump in the number of high-net-worth individuals) sales leading up to 2020. Short-term trends support in the developing world has been staggering and this thesis: most participants in the United States’ creates new opportunities for luxury brands whose ‘cash for clunkers’ program have exchanged SUVs demand in the developed world is in decline. A and small trucks for smaller cars.28 recent Deloitte Consulting LLP survey indicated the upper end of the customer base, those individuals In emerging markets, car ownership is becoming with high levels of disposable income, will seek luxury more widespread, and yet the gap between car brands with performance features as well as luxury ownership in major markets such as Brazil, Russia, add-ons, such as leather seats, sunroofs, and heated China, India, and the developed world remains seats.31 significant. In the United Kingdom, for example, there are 511 cars on the road for every 1,000 citizens. But in high-growth China there are only 22 per 1,000, while in equally booming India, there are Figure 13: Number of cars per 1,000 people – 200832 600 only 11 per 1,000 (see Figure 13). 511 Numbe of cars per 1000 people 490 499 500 Car ownership in the developing world is set to 458 rise. The largest purchasing segment by 2020 will 400 be those customers buying a car for the first time.29 1 They, too, are expected to be value conscious. 300 212 India provides a telling example. “India will have 200 er a growing set of young people who will need 102 100 transportation solutions,” says RC Barghava, 11 22 Chairman of Maruki Suzuki India. “The needs of 0 these young people are the most critical and OEMs US UK Japan Germany Brazil Russia India China will have to fine-tune their portfolio accordingly”. Source: “Automotive Industry Briefing”. Economist Intelligence Unit A new era Accelerating toward 2020 — an automotive industry transformed 9
  12. 12. 3. Shades of green — cost vs. consciousness Higher fuel prices and concerns over global warming “In India the majority of people want have focused attention on cars that either rely less vehicles to commute. They are customers on traditional fossil fuels or use renewable sources of less expensive energy. But there is a notable who look for utility.” discrepancy in the perception of the value of these cars.33 While a majority of U.S. drivers (52 percent) — Ravi Sud, CFO, Hero Group claim a preference for alternative fuel vehicles, only 28 percent would be willing to pay a premium. In India, even fewer respondents (20 percent) were The market for luxury cars in the developing world interested in paying an upfront premium for cheaper might best be compared with the explosion in long-term fuel costs (see Figure 14).34 demand for high-end brands in the late 1990s and early 2000s in North America and Europe. OEMs with Most customers, it seems, do not feel that the strong luxury car portfolios can take advantage of this savings at the pump are sufficient to offset the growing segment by establishing a significant global higher price of today’s alternatively fueled car. This brand presence and catering to regional needs. will prove especially true among first-time car buyers But there is a challenge. The current practice of in emerging markets who will always be sensitive to developing specific luxury models for specific purchase price and lifetime costs. markets may no longer be economically feasible and, as discussed above, the development and The challenge for OEMs is to achieve manufacturing marketing of luxury models will need to use global efficiencies with alternative powertrain by bringing platforms to reduce overall expenses and maximize down the cost of batteries. With considerable platform volume. This may undermine the exclusivity government support, many companies are pouring of certain brands and diminish their perceived value. resources into researching this issue. The OEM that develops a battery that is either cheaper or powerful enough to get the customer to pay a premium will find itself with a technology that may become the standard and that OEM will enjoy all the corresponding advantages of being the first mover. Figure 14: Alternate fuel – preferences vs. willingness to pay36 60 In emerging, high-growth markets, consumer 52.1% 50 preference for green vehicles is shaped by local 46.9% 46 9% environmental issues and government policy, as well 41% 40 as relative costs of different fuel options. For example, Brazil’s enthusiastic adoption of flex fuel is a direct 30 28% 24.8% result of a government initiative to relieve the country 20% of its reliance on petroleum imports. A BMW China 20 11.6% 11 6% senior executive points to an acquisition tax cut on 11% 10 vehicles with engines smaller than 1.6 liters that spurred growth in sales of small-engine cars.35 0 US Japan India China Percent of respondents prefer Percent of respondents willing to pay Source: 2009 Deloitte Automotive Survey. Deloitte Consulting LLP 10
  13. 13. 4. Safety first – consumers to be attentive Consumers also professed interest in features that: to innovations • Reduce distractions (via hands-free calling and As technologies evolve, safety remains a primary access to managed content41) customer need across all markets. Indeed, a 2008 • Improve navigation (through GPS and traffic Consumer Reports survey on car brand perception updates) found that U.S. car buyers view safety and quality • Enhance entertainment (with satellite radio, MP3 as the most important considerations to their connections, and access to digital music) final purchase decision.37 In India, while price and fuel economy are most important, safety falls Because of these tendencies, as the economy right behind.38 It comes as no surprise, then, that improves over the next two to three years, an consumers surveyed in both the U.S. and India increase in demand for safety-related connectivity indicated a willingness to pay a premium for features will likely be seen across all global markets. and options such as skid control, telematics, safety OEMs must realize that vehicles exist within an devices, and blind spot mirrors. By comparison, evolving technology ecosystem, one that extends the least-valued features are conveniences not beyond the traditional car. In a decade’s time, for associated with safety, such as power lift gates, soft example, the cell phone may contain many of the close, or cap-less fuel door systems (see Figure 15). same navigation, communication, and tracking features currently being developed for automobile Consumer interest in safety has prompted use. iPod and MP3 player connectivity are already government involvement. In the U.S., for example, common features. The car will have to interface with the National Highway Traffic Safety Administration other tools to keep pace with (and leverage) the fast has introduced a proposal to mandate Electronic moving consumer electronics industry.42 Stability Control on all passenger vehicles by the 2012 model year.39 The number of potential options is dizzying and To meet increasing consumer demand for safety, OEMs will find themselves in the difficult position OEMs will need to focus on developing and of having to bet on some at the expense of others. providing safety-related features. This will present Unfortunately, their ability to bet right will be several challenges to engineers as they try to compromised by the fact that these components improve crash safety standards while meeting the increasingly belong to the high-tech industry and need for cheaper, more efficient cars (e.g., smaller and lighter) among value-conscious drivers. These consumers will reward car makers who make best Figure 15: Customer willingness to pay for technology43 400 use of advanced materials and innovative design. 362 350 5. Staying connected — the need to Avg. willingnes to Pay ($) 300 be networked 250 250 Safety is also an important consideration when it ss 200 180 comes to choosing electronic options that enable the driver to keep in touch. Features like automatic 150 crash notification, emergency assistance, and remote 100 81 A 52 vehicle diagnostics spurred strong interest among 50 25 customers surveyed.40 Of course, being connected 0 offers several other benefits in addition to safety. Vehicle skid Telematics Blind spot Power lift gate Soft close Cap-less fuel control safety services mirror door system Source: 2009 Deloitte Automotive Survey. Deloitte Consulting LLP A new era Accelerating toward 2020 — an automotive industry transformed 11
  14. 14. While the need to test drive is the major barrier to growing online sales, customers are also hampered by: “To be successful, car marketers must use • An inability to access accurate and complete the internet to develop virtual showrooms product and pricing information online • Unsuitable interface to negotiate on pricing that can be easily navigated by customers.” with dealers • Concerns about delivery — RC Bhargava, • Lack of integration with related services, such as Chairman, Maruti Suzuki India financing and insurance • Low connectivity rates and internet access in not among the core competencies of automakers. emerging markets To lessen the chance of getting it wrong, it will be Additionally, in many markets dealers wield essential for OEMs to work with players in high tech considerable economic and political clout. In the to combine their expertise and develop the features United States, for example, state franchise laws customers are willing to pay for. restrict direct OEM sales. 6. The web – mixed reviews for internet as a sales channel These factors will hamper OEM efforts to increase More and more customers are turning to the internet online sales, and as a result, large-scale adoption to purchase cars. The past five years have seen a of the internet as a sales channel is unlikely, and steady increase in sales volume, with a compound companies will continue to rely on dealerships as annual growth rate of 14.6 percent in the United their primary sales channels. States and 20.1 percent in Western Europe.44 As a But OEMs are clearly still attracted to growing the percentage of total sales, however, more individuals internet sales channel. General Motors and eBay still prefer to see, touch, and test drive their car before recently launched a test program in California that buying. Only 4 percent of total car sales in the United will allow consumers to negotiate with dealers to States take place online (see Figure 16).45 buy vehicles online.46 Figure 16: Online buying as a percent of total sales in the United States48 Another source of hope for online sales resides in $35 60% emerging markets such as India and Brazil, where 4% 53% $30 the commoditization of vehicles at the entry-level will 50% reduce the need to compare and contrast or negotiate commerce sale ($ Billion) $25 24% with a dealer over options and price. But companies 40% Percent of total category sales $20 should not neglect the web as a sales tool. “Parts and es y 30% after sale service purchases are already strong online $15 18% and will continue to grow,” says Daimler’s Jerome $10 20% Guillen, Director, Business Innovation.47 Ec $5 10% 7. Changing preferences — older, more urban consumers $0 0% Autos and auto Computer Computer Consumer As the median age of the populations of Japan, parts hardware and peripherals electronics software Western Europe, the United States, and Russia 2011 E Online percent of total category sales in 2011 creeps upward, car makers will need to address Source: Forrester, Forecast: U.S. and U.K. online retail sales by category, 2006 to 2011 the changing priorities of older drivers in order to 12
  15. 15. gain and retain their business. A recent Deloitte poor enough that people who currently own cars are Consulting LLP survey showed that the mature unlikely to abandon them. In these markets, 70 to 80 demographic segment in the United States value percent of vehicles on the road are small and this is quality, price, and safety above fuel economy, not expected to change over the next decade.52 styling, brand, and even the warranty (see Figure OEMs will need to evaluate alternate models of 17).49 In Japan and Russia, ergonomic features have mobility and rethink typical vehicle packaging, been cited as a selling point for the same segment.50 proportions, and use options for their urban To reach the mature driver, OEMs will need to customers. Different markets will need alternatives to focus on the development of user-friendly, intuitive, the traditional single-owner model. Smart, flexible, low-cost vehicles. Vehicles targeted for the older user-friendly rental options, such as Daimler’s Car2Go driver will need to be designed with human factors in Germany (launched in 2008)53 and Zipcar in North in mind: Easier vehicle entrance and exit, larger America,54 will have to be considered. displays, improved lighting, and augmented night driving. With features designed to augment safety and reliability, these cars will improve the ownership experience compared with current low-cost options. “Parts and after sale service purchases are The other important demographic trend is urbanization. Around the world, cities are already strong online and will continue to experiencing strong population growth. In developed countries, the proportion of the grow.” population living in urban centers is currently 75 — Dr. Jerome Guillen, Director, percent, while in the developing world urban Business Innovation, Daimler dwellers represent 45 percent of the population. However, by 2020, those numbers are expected to rise to 78 percent and 55 percent, respectively. By that same year, there will be 24 megacities with Figure 17: Attribute preference for the “mature” customer55 populations of at least 10 million.51 18% Customer segment average age: 53 yrs. Since improvements in infrastructure usually lag population growth, increasing urbanization will 16% mportance make city streets more congested, noisy, and 19% polluted. Commute times will lengthen. Those who Percent Im continue to drive in cities will look for smaller, more 15% fuel-efficient vehicles. But as congestion increases, 10% many customers will abandon car ownership (or leasing) in favor of public transit. Even in these cities, 15% however, consumers will need periodic access to vehicles for trips to outlying areas and other special 7% occasions. Quality Price Safety Fuel Economy Styling Warranty Brand Attribute Importance 19% 19% 19% 15% 11% 9% 8% Where public transit is inadequate, a car will still Survey-Avg. be the preferred day-to-day option. In many Latin Source: 2009 Deloitte Automotive Survey. Deloitte Consulting LLP American cities, for example, public transportation is A new era Accelerating toward 2020 — an automotive industry transformed 13
  16. 16. 14
  17. 17. Technology to reflect new sets of demands Consumer demands and new regulations will heavily influence the development and marketability of innovations in the auto industry. First among these demands is fuel efficiency, which will lead to new (or improved) powertrain technology. But safety and infotainment are also important consumer considerations. The approach to technology will differ between developed and emerging markets. Advanced combustion engines will extend the reign of combustion engines over alternative technologies. The approach to technology content in cars will be 1. Powertrain technology and the move divided on regional lines. Green alternatives, such as to electric electric cars will likely find more consumer interest in Currently, hybrids and electric vehicles (EVs) wealthier countries while flex-fuels, such as ethanol represent a tiny fraction of total cars on the road. In and natural gas will find wider adoption in emerging Germany, of the 49.6 million cars56 in operation, a markets where the local climate or resource base mere 1,500 are electric while 22,300 run on hybrid favors these fuels over petroleum. technology.57 Yet growing environmental concerns among consumers58, environmental regulation, The outcome will be a variety of powertrain volatility of gas prices, and depletion of oil reserves59 technologies in the market by 2020. Government will translate into a moderate increase in demand for policies will heavily dictate the portfolio mix in each EVs by 2020, epecially for use in short commutes. country. These policies will be driven by a number of factors from stricter carbon emission standards to With large-scale production of EVs set to begin in independence from foreign energy. Europe in 201160, the growth potential in Europe should not be ignored. Although the number of EVs Deloitte member firms estimate that by 2020, on the road will remain low at first, surveys suggest electric vehicles and other “green” cars will represent that Europeans are willing to switch to EVs.61 up to a third of total global sales in developed markets and up to 20 percent in urban areas of Barriers to widespread adoption of EVs emerging markets. Between now and 2020, there are several potential barriers to the wider adoption of EVs: Industry players need to be aware of the following trends in order to take advantage of the most • Elevated costs of electrically propelled vehicles important opportunities emerging among car buyers • Limited range of EVs around the world. These trends include: • Lack of infrastructure 1. Powertrain technology and the move to electric • Lack of government incentives or subsidies 2. The shift from mechanics to electronics 3. Low tech mobility A new era Accelerating toward 2020 — an automotive industry transformed 15
  18. 18. Currently, electric vehicles are significantly more Government incentives to spur EV adoption are also expensive compared to traditionally propelled lagging. Although governments in the United States vehicles. This is due mainly to the costs of the and Western Europe support the development of lithium-ion battery, which adds €10-€15,000 to the EV technology68, only France, England, and China price of a traditional internal combustion vehicle.62 offer subsidies (up to €5,000 or US$7,100) on Also, specialized microprocessor controls for the EVs.69 In Germany, the government offers a car tax electric motor and the need to adapt systems such exemption70 to EV buyers rather than a cash subsidy, as air conditioning (which usually draw power from although with the yearly tax burden for owning a the combustion engine) increase development cost Volkswagen Golf set at €124, the incentives are of EVs as well as the end customer price.63 Better hardly overwhelming. That said, whether through Place tries to answer this problem with a lease tax measures, subsidies, or regulatory reform, model for an EV’s battery pack: The battery pack will government can still play an enormous role in the remain the property of the company and customers spread of EVs, according to Daimler's Dr. Jerome are charged a monthly fee. However, the future for Guillen, Director, Business Innovation, and this model is highly uncertain.64 Dr. Frank Spennermann, Senior Manager, Business Innovation.71 Another significant barrier to the adoption of EVs lies in the very limited reach of EVs compared with Some municipalities are taking steps to build traditionally propelled vehicles. The electric vehicles infrastructure. In Stockholm and Amsterdam, for of the first generation, which will be launched over example, recharging stations are already in operation. the next two years, come with a range of less than In Germany, larger utilities (RWE and EON) are 200km. That means that consumers would need building infrastructure while in Canada, the City of to alter their usage behavior dramatically. Instead Vancouver recently voted to expand electrical vehicle of refueling their ICE propelled vehicle as needed usability by requiring developers to put electric-car in 5-10 minutes, drivers of EVs would likely plug-in plug-ins in a percentage of new condominiums their vehicle every night to top off the charge.65 and apartments.72 Companies are also preparing. In October 2009, Daimler will loan the City of Berlin a The limited range of lithium batteries creates fleet of 200 EVs for testing purposes.73 the need for thousands of recharging stations placed along highways, throughout cities, and in Finally, the ascent of EVs in developed markets is likely parking garages. Better Place is currently building to be threatened by the emergence of alternative infrastructure,66 but much more needs to be done fuel technologies, as discussed below. If research and before drivers will trust driving their EVs over longer development (R&D) efforts are able to reduce the distances. Moreover, initiatives to standardize “well-to-wheel” efficiency of advanced technology batteries and connector plugs have yet to emerge. and biofuel combustion engines significantly below 120g CO2/km74, mass market adoption of electric Because of this, as well as increased urbanization vehicles may be delayed due to increased customer and higher maintenance costs, a senior executive acceptance of the existing technology. at FAW-Volkswagen in China believes that “small electric vehicles will develop only for short distance driving. These cars will be used in conjunction with city buses and railways.”67 16
  19. 19. Internal combustion engines to dominate in world.79 And, similar to those barriers cited for emerging markets the developed world, emerging markets also lack In emerging markets, new car sales will likely be infrastructure and regulatory support for the wide- overwhelmingly dominated by traditional, internal spread adoption of EVs. combustion engines. One reason is the price of fuel. Fuel taxes make for significantly more expensive Developments in the EV space are widely discussed gasoline in Japan and Europe, in some cases more with several new models recently introduced or than double the price of fuel in developing markets.75 planned to be launched in the next few years (see Figure 18). Lower-cost EVs like BYD in China and However, there is considerable interest in reducing E-Nano by Tata in India are capturing attention and pollution in the megacities of China and India and may be encouraged by governments as a means to where price is not the only factor, demand will vary counter congestion in larger cities. based on largely political and geographical factors, says a senior executive at Hyundai China. “Driven by The hybrid stepping stone pressures on energy saving and emission reduction, While consumers await a more EV-friendly world, developed countries will proceed with the adoption hybrid vehicles will serve as transition technology in at a relatively high pace”.76 developed and developing markets, according to a senior executive at BMW China.80 Hybrids feature The impetus to go electric as a means to reduce lower carbon emissions, greater fuel efficiency, and carbon emissions is less acutely felt in China and are less infrastructure intensive than EVs. They also India, where aggregate carbon emissions from aid in the switch from full-combustion engines to automobiles are miniscule when compared with electric motors. emissions from coal-fired power plants.77 But, the Chinese governments’ push to be one of the Sales of hybrid cars bear careful scrutiny as they leading producers of hybrid and all-electric vehicles will reveal customer preferences to carmakers. It is within three years may see them leapfrog current expected that by 2020, hybrids will still outnumber EVs technology and strengthen its competitive position.78 but trends point to a fully electric long-term future. Other cost barriers include the price of a battery, which is prohibitive for many in the developing A new era Accelerating toward 2020 — an automotive industry transformed 17
  20. 20. Figure 18: The most talked about electric vehicles81 Electric Launch Automaker Model power cons. Charging time Range Price Comment date (kwh/100km) Think Global AS Think City 13hrs 180km €20-25 k 2007 Tesla Roadster 14 3.5hrs 350km €75 k 2008 Quick-charge: 80 percent in €35 k (will be skimmed Mitsubishi i-Miev 30 minutes; household charger 160km along production volume; 2009 (200V): 100 percent in ca. 7hrs target price: €15k) €24 k (including a Quick-charge: 80 percent in Plug-In subsidy of €10 k by Subaru 15 mins; household charger 80km 2009 Stella Next Generation Vehicle (200V): 5hrs Promotion Center) Second Quick-charge: 50 percent in Pre-sale: 200.000yuan BYD Auto E6 18 > 400km half of 10 minutes (€20.000) 2009 * Battery not Comparable to a included in Nissan Leaf Quick-charge: 30 minutes 160km traditionally propelled 2010 end-customer vehicle* price; must be leased GM Volt 10hrs (120V) 64km €30 k 2010 Range Extender Quick-charge (400V, 64A): 100 Kangoo Be Renault percent in 30 minutes; household 160km €21 k 2011 Bop Z.E. charger: 4-8hrs Ford Focus 2011 All-electric Toyota urban 2012 commuter Tesla Model S Quick-charge: 45 mins 255-480 km €50 - 60 k 2012 Daimler Smart EV 2012 Volkswagen 2013 Megacity BMW 2014 Vehicle 18

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